CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities
Kaveri Engineering Ltd owns a machine bought for ₹50 lakh with a total useful life of 10 years. It is now 4 years old. Current cost of an identical new machine is ₹60 lakh. Using the replacement cost approach with straight-line physical depreciation and no functional or economic obsolescence, what is the machine's value?
The machine is valued at ₹36 lakh. Replacement cost approach starts from the current cost of a new equivalent, ₹60 lakh, and deducts 40% physical depreciation (4 of 10 years), which is ₹24 lakh. Using the original cost of ₹50 lakh as the base would be incorrect.
- A₹36 lakhCorrect
- B₹30 lakh
- C₹32 lakh
- D₹40 lakh
Explanation
Replacement cost new is ₹60 lakh; physical depreciation = 4/10 = 40%, i.e. ₹24 lakh. Value = 60 − 24 = ₹36 lakh. Applying depreciation to the historical cost gives 50 × 0.6 = ₹30 lakh, which is the wrong base.
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